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Wednesday, December 31, 2008

The Worst Hyperinflation in History

Dr. Thayer Watkins, an economist, has a sobering article, "The Worst Episode of Hyperinflation in History: Yugoslavia 1993-94." The criminal leaders and central bankers of that nation began printing up massive amounts of money to deal with their runaway spending. This led to incredible social turmoil and loss.

"Between October 1, 1993 and January 24, 1995 prices increased by 5 quadrillion percent. That's a 5 with 15 zeroes after it."

One of my heroes, Nikolai Tesla, the real father of the electric age, was honored by his homeland (he was from Serbia - part of the former Yugoslavia) with this bill:


That's a 10 billion dinar note (high-res version purchased from iStockphoto.com for use in my forthcoming book, Conquering Innovation Fatigue through John Wiley & Sons). I think it was good for a couple loaves of bread at the time. There was even a 500 billion dinar note printed that you can see in Dr. Watkins' article.

I'd like to know if there is anything fundamentally different between what Yugoslavian tyrants did to destroy their economy and what our leaders are doing right now. Did any of you notice that the outrageous national debt - the result of decades of corruption and malfeasance - was DOUBLED in the past few months by our current leaders? Adding 5 trillion dollars to our debt, creating hundreds of billions of dollars of new money every month, selling out our future, taking the money of all working people to dump into the black holes of greed and failure without accountability -- the impact of such corruption and greed cannot be escaped. We are witnessing the largest theft and financial mismanagement in the history of the world - and the solution being proposed by the next guy coming into power is more of the same (swiping up another trillion dollars from US citizens to provide "stimulus" - an approach that is guaranteed to fail and further erode our economy and freedoms). No one seems to ask the question: Who is benefiting from all this debt? Who is reaping the rewards of our insolvency? And how can we survive if this keeps up?

When hyperinflation or other economic and political calamities strike, it can be swift and violent. It can take everything you have and everything you have worked for. Take these things seriously and prepare now while you can. I don't think you'll regret building up your food storage. I also don't think you'll regret putting part of your assets into something that won't evaporate if the CEO is a crook, if the company is Ponzi scheme, if China decides to abandon the US dollar, or if the national debt and the amount of US dollars created from thin air triples in 2009.

The socialist paradise of Yugoslavia and its economic failure is something we should study. Ditto for the Weimar Republic and, more recently, Zimbabwe, whose corrupt leader and source of their devastating hyperinflation was praised by our media as an almost Messianic figure who came to save the people of that now hopeless nation. No apologies now for their past endorsement of Mugabe. The lessons, though, are worth learning. You won't learn them from the New York Times.


Update: Yes, we are currently experiencing monetary deflation, as the vast amounts of money are being pulled out of circulation and the huge new quantities being created are dumped into banks that aren't using it for anything except protecting their solvency (plus throwing some lavish parties, issuing a few massive bonuses, and lobbying Congress to give them even more). The momentary failure of the newly created money to be put into circulation, however, is like water accumulating behind a loose earthen dam. Eventually it is going to flow again, and when it does, the vast creation of fiat money will lead to massive inflation. Temporary, transient deflation, yes, but inevitably followed by a tsunami of inflationary forces that will make bring us closer to the Zimbabwe model - for we are following their path in financial stewardship. Howard Ruff's article, "Keynesian Economics Works - Sometimes!" explains it well, in my opinion.

18 comments:

KingOfTexas said...

What do they say about living in ignorance and apathy? I don’t know and I don’t care; but get me out of this mess you made me crate.
I built a portable 1,000,000 volt Tesla coil to zap stuff. Pretty cool for someone from the 1800’s.

Anonymous said...

I am just a lowly chemist that is finally making respectable money after years of undergrad & grad school, but without much economic saavy. So last week at our family Christmas eve party I thought that I should ask several of my relatives (that have been actively investing for a number of years) for their opinions on what the economic future might hold. In particular, I asked about the possibility of hyperinflation. None of my relatives seem very concerned. Some seemed to be quite optimistic that all would be just fine.

I've read much lately from supposed expert economists that make seemingly good arguments for hyperinflation in the very near future. I am very concerned about it, but not many people that I know personally (people that know more than I) seem to think it is a real threat.

The biggest problem I have with the essays that I read from the hyperinflation prognosticators on the net is that they or their webpage are always trying to sell something (i.e., gold, etc). Hence my skepticism.

What are all the things one can/should do to fully prepare for such a scenario? Also, how does one protect their money? Also, I have 4 kids (2-12), what can they do to prepare in their studies, etc.? If anyone without something to gain can offer their opinion, it would be appreciated.

woodboy said...

Commenter #2 is right in that most of the people pushing hyperinflation on the internet are trying to sell you gold. In a hyperinflationary scenario, savings are worthless, and the only things that hold value are real assets--property, food, gold, etc. Here is a fun link that tells the tale in pictures:
http://humorland.wordmess.net/20081025/what-the-real-crisis-is-like/

However right now we are in a deflationary unwind of epic proportions, so hyperinflation is not really the immediate worry. In deflation, cash holds its value well, while assets (e.g. stocks, houses) tend to get killed.

As to the question in the original post, what is the difference between here and Yugoslavia? I would say there are a few key ones. First, the dollar is still the world's reserve currency. US debt is considered among the safest in the world, and the dollar benefits from the flight to safety trade in Treasuries. Just look at how high treasuries have been bid up the last several months. The solid demand for US sovereign debt makes the dollar unlikely to suffer a crisis of confidence severe enough to induce hyperinflation. Also, the current problems are global in nature, and everyone is rushing to devalue their currencies at the same time. The dollar should hold up reasonably well on a relative basis. Capital flight is less of a risk than in a small politically unstable country--what currency would people pile into?

That said, I agree with the main point of your post. The amount of money and debt being created in such a short period of time are mind boggling and irresponsible. The Treasury is issuing the debt and the Fed is buying it. In normal times, in a vacuum, this would have destroyed our currency. But the money multiplier is below 1, and bank reserves are at astronomical levels, so the money is not making its way into the system as it normally would. The question is down the road, when things begin to heat up again (which may be a long time), will the Fed be able/willing to sell all of its garbage assets to mop up the extra money they've created and prevent severe inflation? Judging by how they've acted over the last several years, there is cause for concern. It's disheartening to see how little the government cares about having a strong currency though--such a thing is not easily gotten and should be cherished. Just ask any of the number of countries that has suffered a currency collapse over the last century.

The real problem, as the original post pointed out, is the growing debt burden, and the monetarization of that debt. Everyone in charge seems to think we can borrow and/or devalue our way out of trouble. The combination of Keynesians and monetarists is dangerous, and judging by the proposals being thrown around, it's only going to get worse in the near future. All fiscal responsibility has been thrown out the window.

Mark D. said...

The national debt most certainly has not doubled in the past few months. It is currently about 10.6 trillion. It was half that figure about fifteen years ago.

Much of the most recent borrowing (i.e. to fund TARP) is collateralized by actual assets (loans, primarily). Unless every bank in the U.S. goes under, we will get the vast majority of our TARP funds back in a few years. The same goes for the loans the Fed has made lately.

TheNastyOne said...

To Commentor #2: You should buy my survival kit. It includes ground wheat, bottled water, a S&W .45, and a cyanide pill to be used after the wheat, water and bullets run out.

I thought i was one of the few who noticed the US government doubled-down on our national debt...no chance of hitting blackjack on this one, though. Glad to learn others are taking notice as well.

I dont know what the future holds because i lost my seerstone in a bitter divorce settlement, but it certainly looks grim.

1. Who is benefitting from this debt? Well, the owners of the national debt benefit financially from the interest payments we US citizens make via our personal income tax burden. So, who are the large owners of the US national debt??

The investment banks and certain corporations are benefitting from the bailout. I certainly would not object to a few minutes alone with Paulson & Company and a firm bamboo stick. His $700bb bailout bait and switch was an obvious ploy to plug the gaping and growing financial holes that threatened to tank the very institutions the governing establishment relies on for financial control. Add to that their newly-passed and nifty tax break for bank acquisitions coupled with their bailout-financed "employee retention bonus program", and every american ought to be screaming for a $350bb refund and equal time with the bamboo stick. It is truly audacious. yet americans say and do nothing to stop this nonsense...

2. Can we survive if this keeps up? Yes, but only through extreme hardship in many forms, borne as always on the backs of US taxpayers. Americans have been brought into financial bondage; I find the narrative on King Limhi's post-King Noah experience pertinent to our potential trials.

3. I agree with Commentator #3 that deflation marks our short-term economic outlook since our economy will continue downshifting well into 2009, which will continue to prop up the $US. But after the economy hits bottom, inflation must take hold because the Fed is increasing our money supply at an alarming rate. How is the Fed going to mop up the enormous excess supply?

Add to that the growing troubles with Russia and potentially China, Iran and Venezuela. Now, I dont know if the US is headed for serious conflict with Russia & gang, but the signs are certainly there. But if China and/or Russia decide it is in their best interest to dump the $US as the currency-mandate for the oil exchange, we can expect further risk of devaluation and inflation in the $US.

Lots of potential for very interesting world affairs. What a time to be alive! and cash-rich and debt-free, of course. wow...think back to President Hinckley's c.2001 reference to Joseph of Egypts dream about the 7 years of plenty and 7 years of shortage, and his warning of a looming financial storm. prescient...

as for me, i am off to buy a luxury car i cant afford...on credit.

fake credit...

TheNastyOne said...

MARK D -

the national dent most certainly HAS doubled in the past few months. The total cost of commited funds for the bailout has reached $8 billion. Add that to the $10 billion national debt we had prior to the bailout, and the national debt just doubled. This has been reported in every major newspaper, do a search and you will discover this fact. And more bailout money is expected to be sought in 2009.

Secretary Paulson trashed the TARP program months ago when he diverted the $350 billion slated for TARP to shoring up the investment bank balance sheets. basically, paulson put that money in the bankers pockets and allowed them to do with it as they pleased, which to date has included paying bonuses, acquiring other banks and leaving it on their balance sheets. Almost none of the money has been used to increase liquidity (lending) in the market, which was the original purpose of the bailout. Again, this is widely reported in the news and is a current subject of much controversy as banks refuse to disclose how they are using the bailout money the US taxpayers gave them. It is a travesty!

Anonymous said...

Not everyone agrees with the hyperinflation outlook. Check out this post;

http://market-ticker.denninger.net/

Mark D. said...

TNO: Some of your numbers are off by a factor of a thousand. Others by a factor of one hundred. Doesn't inspire much confidence, I hesitate to say.

TARP authorizes the government to "spend" at most $700 billion. Even if TARP expenditures represented a real increase to net national indebtedness (which they do not), that is a small fraction of the current national debt of $10.6 trillion.

Mark D. said...

One more thing: The national deficit is not the same thing as the national debt. The national deficit is the amount the national debt increases in a given year. Not the same thing.

The deficit for 2008 has indeed doubled in the past few months, albeit in an illusory fashion.

Connor said...

Zimbabwe wins for having the highest note: $100 Billion. But apparently their rate of hyperinflation was not as high as the one you mention in this post, though the fact that Mugabe whacked 10 zeros off the currency to "start over" a bit only masks the obvious (that they are still hyperinflating).

Hmm, now I have to get that Yugoslavia note as well for my collection. Time to pull up eBay...

woodboy said...

Mark D. is right that the national debt has not doubled in the last several months, not even close. 8 Trillion is the total notional value of all the bailouts (depending on how you figure it). Some of those are things like loan guarantees. They are obligations of the government, but not necessarily part of the the national debt. The size of the Fed's balance sheet has doubled or tripled in the last few months, but that is not the same thing as the debt. Remember, with a fiat currency, governments can devalue their currency to support spending (by printing money) in addition to borrowing.

Rick said...

On a personal level the first order of business is to get out of debt. Many of my neighbors have done that, as have I, and about the only concern we have is what to do with our surplus cash. Some of my friends have bought foreclosed homes and are keeping their original home (that is paid off) to sell when the market recovers. They are funding their new mortgage from some of the money they would normally allocate to their 401K. That is a route I'm tempted to take, especially if high inflation is around the corner. Thank you for a very interesting article and reminder.

TheNastyOne said...

Mark D: If you are referring to the $8 billion and $10 billion I wrote, "billion" was a typo. Clearly, I meant trillion.

If my error by a factor of 100 is in reference to the $350 billion Paulson has spent on banks, I wasnt referring to the total amount of the $700 billion TARP program, just the portion Congress authorized Paulson to spend so far, which he diverted.

In any case, you are correct that the national debt has not doubled...I was in error.

Nuestro Temor said...

Anyone notice what we did with Fannie Mae and Freddy Mac? The effective debt we have assumed there is $5 trillion, effectively doubling the national debt in one fell swoop. That's not including the trillion-plus added for other bailouts. This has been the most criminal administration in history.

From the Economist:

FANNIE MAE and Freddie Mac, the two government-supported mortgage giants at the centre of America’s housing market, pose a particularly acute problem for the Bush administration. Not only are they too big to fail. They are almost too big to rescue.

They hold or guarantee some $5.2 trillion of the nation’s $12 trillion of mortgages, backed by the thinnest wafer of capital, meaning their collapse would imperil the already paralysed American housing market. Yet as Joshua Rosner, an analyst at Graham Fisher, a research firm, points out, nationalising them, a stark choice for the government since their shares tumbled last week, would “result in a doubling of the federal deficit, a further collapse of the dollar and unthinkable implications for the Treasury’s cost of funding in the debt markets.”

woodboy said...

Guaranteeing $5t of mortgage debt is not the same as borrowing $5t to increase the national debt. And as far as the Economist's predictions go, since that article was published (July), the dollar has appreciated significantly and the Treasury's cost of funding has fallen to an all-time low.

Also, it's not at all clear that Fannie and Freddie securities actually do have the full backing of the US government. A full faith and credit guarantee still has not been made explicit, despite the fact that they are in conservatorship.

djinn said...

There's been a huge amount of wealth destruction lately--all the loss in the stock market; the huge loss in housing prices, the collapse of wide swaths of the derivative markets -- google "credit default swap" Methinks you have it backwards. We're going into a DEFLATIONARY period. The exact opposite.

Anonymous said...

Djinn:

1. The items you list are not really forms of "wealth destruction." They are the kind of periodic economic corrections that are inevitable when the government has as much control over the market as ours does.

2. Deflation has nothing to do with wealth destruction. Deflation and inflation describe the state of the money supply.

Mormanity said...

Yes, we are currently experiencing monetary deflation, as the vast amounts of money are being pulled out of circulation and the huge new quantities being created are dumped into banks that aren't using it for anything except protecting their solvency (plus throwing some lavish parties, issuing a few massive bonuses, and lobbying Congress to give them even more). The momentary failure of the newly created money to be put into circulation, however, is like water accumulating behind a loose earthen dam. Eventually it is going to flow again, and when it does, the vast creation of fiat money will lead to massive inflation. Temporary, transient deflation, yes, but inevitably followed by a tsunami of inflationary forces that will make bring us closer to the Zimbabwe model - for we are following their path in financial stewardship. Howard Ruff's article, "Keynesian Economics Works - Sometimes!" explains it well, in my opinion.

Deflation and inflation are monetary phenomena. Pulling money out of the economy can create deflation for a while, but when the quantity grows at ridiculous rates, when it finally returns to being used, look out. Inflation is what looms over us, even if we face deflation for a few months or even years. That's the real disaster ahead.